Occupy Wall Street's Top Priority Should Be to Kill the Bush Tax Cuts

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How can our do-nothing Congress respond to the needs of the 99 percent? The first step is to do nothing and let the Bush-Obama tax cuts expire.

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The Occupy Wall Street protesters could not have picked a better target.

The U.S. financial industry, symbolically headquartered around that Lower Manhattan street named for a "earthen wall" in 17th century New Amsterdam, epitomizes everything that is wrong with America today. For years, bankers got spectacularly rich manufacturing toxic securities and passing them off onto unsuspecting customers. Then they blew up their own banks, forcing the federal government to bail them out. Now, with long-term unemployment at a record high, the financial sector has not only returned to record profitability, but also, its twenty-somethings are publicly complaining about making less than $500,000 per year.

Letting the tax cuts die is not a panacea, but a first step toward a making more progressive policies possible.

Wall Street is not the source of all evil, of course, and better financial regulation would not solve all the problems of inequality that Occupy Wall Street has brought to the public's attention. Look at the photos on the We Are the 99 Percent blog, and you can see that the problems are more complicated and diverse: no health insurance; unemployment or underemployment; high levels of debt, often because of student loans; houses in foreclosure; and, because of all that, a lack of funds to pay for housing, food, transportation, and health care. This is blog, not an official Census. But with 24 million people out of work or underemployed and 50 million people without health insurance, it seems like a fair cross-section of a troubled nation.

It's widely acknowledged that OWS is asking good, tough questions. But even among supporters, the chief criticism has been the movement's lack of focus. Yes, health insurance is too expensive and unemployment is too high. Sure, it would be nice if the financial-real estate complex hadn't wrecked the economy (with an assist from a captured government). But America was a deeply unequal country even in 2007. What ideas would solve these problems?

One can imagine a list of long-term, long-shot ideas: Guaranteed long-term unemployment benefits (not the kind we have now, which can be held hostage every year or so); universal, low-cost health care; low-cost, public higher education;* more rental housing assistance; and more money for food stamps. It goes without saying that we need to keep Social Security and Medicare in something like their current form, or else things will only get worse when people turn 65.

The problem, though--leaving aside our do-nothing Congress, which I'll come back to--is that these things cost money. Therefore, the first step toward solving the problems raised by the Occupy Wall Street movement should be to let the Bush tax cuts expire.

In 2001 and 2003, President Bush pushed through major tax cuts that reduced rates for everyone, increased exemptions and deductions for the rich, reduced rates on capital gains and dividends (which mainly go to the rich), increased the amount of retirement savings that can be shielded from taxes, and drastically slashed the estate tax (which only affects the rich). To avoid needing sixty votes in the Senate, the tax cuts were scheduled to expire after last year. In December 2010, both parties agreed to extend them through 2012. Republicans now want to make all of them permanent. President Obama agrees with 98 percent of that idea. He wants to make the tax cuts permanent except for the lower rates for families making more than $250,000.

The Bush tax cuts might be the most important inequality-increasing policy of the past twenty years. Sixty-five percent of the tax cuts went to families in the top income quintile; a breathtaking 38 percent of the money went to the top one percent of families. (Richer families also saw their effective tax rates fall by more than poorer families.) Income inequality had already been accelerating for 30 years. The Bush tax cuts turned on the afterburners.

More importantly, the Bush tax cuts are responsible for the current political pressure to dismantle the federal government. So far, they have added almost $3 trillion to the national debt.** Despite all the damage they have already done, letting the tax cuts expire would still eliminate a big chunk of our long-term debt problem. Without the Bush tax cuts, we will have more than $300 billion per year, beginning in 2014, at least some of which could go toward helping ordinary people.*** With them in place, there is no chance of finding the money to patch our threadbare safety net, and one of these years the Republican assault on Medicare will finally succeed. It is a prerequisite for any kind of progressive policy that involves spending money.

Yes, letting the tax cuts expire at the end of 2012 would effectively raise taxes during what will still feel like a recession. It will mean a small tax hike for the middle class. But it's something our do-nothing Congress can actually accomplish because it requires Congress to literally do nothing. Allowing the expiration of a law only takes forty-one votes in the Senate.

To avoid hurting the economy, one option is to replace the Bush tax cuts with an equivalent payroll tax cut that expires in two years. That would do more to boost the economy than a huge windfall for the rich. Payroll taxes mostly affect the middle class, which pays the tax on all income up to $106,800. This stimulus would have no chance of becoming permanent, because neither party would support it once the economy recovers. At the least, President Obama could force the Republicans to explain why a tax cut heavily skewed toward the rich is better than a tax cut that favors the people who need the next marginal dollar and are more likely to spend it.

Letting the Bush tax cuts die is a good idea, not a panacea. It won't give people health insurance. It won't help them pay off their loans. Instead, it is the fastest, most achievable way of reducing inequality and modestly shifting the tax burden upward. And it's a first step toward a world in which progressive policies are possible. We will need more. 

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*Some people say we need loan forgiveness. I can see that, but loan forgiveness almost by definition is an emergency fix, not a long-term policy. In the long term, I think the only real solution to the student debt overhang is not asking people to take on so much debt to begin with.

**Through 2008, they added $1.9 trillion; through 2010, they added another $700 billion; and the December 2010 extension has so far added another $200 billion.

*** CBO estimate of the incremental impact of extending the Bush tax cuts on top of patching the AMT.

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James Kwak, an associate professor at the University of Connecticut School of Law, is co-author of White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.
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James Kwak is an associate professor at the University of Connecticut School of Law and the co-author of 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown. He blogs at The Baseline Scenario and tweets at @JamesYKwak.
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